• 4Q18 core profit fell 82% yoy to RM48m mainly on higher opex and inventory lag loss. Overall, FY18 earnings of RM826m (-23% yoy) fell short of ours/consensus forecast at 76%/80%.

• A lower 4th interim DPS of 25 sen (4Q17: 27 sen) was declared, bringing total 2018 DPS to 70 sen, implying a 90% payout ratio.

• Downgrade to HOLD with lower RM27.25 TP. We see higher opex to offset sluggish sales volume and non-fuel income growth.

Dragged by higher opex and inventory loss

4Q18 core earnings declined sharply by 82% yoy to RM48m mainly due to higher opex and inventory lag loss on sharp drop in crude oil price. This led to a 23% yoy drop in 2018 core earnings to RM826m; it fell short of ours/consensus forecast at 76%/80%.

Retail segment turned to loss

In the retail segment, PDB continued with its aggressive marketing campaign which yielded 3% yoy sales volume growth to 1,646m litres (4Q17: 1,598m litres). This included introduction of the Setel app as the payment platform for fuel purchase. However, higher opex and inventory lag loss more than offset revenue gains, resulting in the segment posting a net loss of RM41m (4Q17: +RM228m). Meanwhile, profits for the commercial segment fell 23% yoy to RM106m as margins narrowed by 140bps to 2.6%. This was despite a 19% revenue growth due to higher ASP to RM2.27/litre (4Q17: RM1.65/litre).

Cut earnings outlook

Excluding proceed of insurance claim worth RM22m from other income, the non-fuel income was largely flattish at RM309m [4Q17: RM308m]. This only made up c.82% of our forecast. Together with higher marketing cost, we cut FY19F-21F earnings outlook by 10-12%.

Declared lower 4th interim dividend of 25 sen

A 4th interim DPS of 25 sen was declared (4Q17: 27 sen). This brings the total DPS declared for 2018 to 70 sen (2017: 75 sen) and implied 90% dividend payout ratio.

Downgrade to HOLD with lower TP RM27.25

Downgrade PDB to HOLD with lower DCF-derived TP of RM27.25 (from RM30.00). This is based on a 7.5% WACC and long term terminal growth rate of 1.5% which implies 26.5x FY19E PE. We see limited earnings growth potential from the stock given PDB’s aggressive marketing hardly bring additional income to the company.

Source: BIMB Securities Research - 27 Feb 2019